The Economics Of Legalizing Recreational Marijuana

Is legalization of marijuana good for the economy and, if it is, is that a reason to make it legal?

An FKD Feature exclusive

Fully legal

Yesterday, Canada became the second country in the world to fully legalize recreational marijuana and the first major economy to do so. Uruguay was the first country to fully legalize marijuana, which it did in 2013. However, it took Uruguay until 2017 to develop its regulatory scheme for the legalization. As of 2017, the government required cannabis users to register with the government, authorized 16 pharmacies to become cannabis distributors and limited the amount and strength of the drug that each could sell. An unanticipated consequence of the regulations was that there continues to be a thriving black market as the government regulations make illegal marijuana stronger and easier to buy. Many other countries around the world have decriminalized marijuana to the point where it is functionally legal, but the government does not reap any direct economic benefits from its sale.

Marijuana laws in the U.S.

The U.S. is a patchwork of laws regarding marijuana that differ from state to state. The recreational use of cannabis is legal in nine states (Alaska, California, Colorado, Maine, Massachusetts, Nevada, Oregon, Vermont and Washington), and the District of Columbia. Another 13 states plus the U.S. Virgin Islands have decriminalized its use. Many states have legalized medicinal marijuana with highly regulated distribution systems. These states include Arizona, Arkansas, Connecticut, Florida, Minnesota, Montana, New Hampshire, New Jersey, New Mexico, New York, North Dakota and Pennsylvania. But, regardless of state laws, federal law still prohibits marijuana use.

Economic stumbling blocks to legalization

More surprising than the continuation of the black market in Uruguay is that the economic effect of the marijuana industry has been blunted because financial institutions are reluctant to get involved with the marijuana business for fear of international sanctions. International treaties prohibit marijuana trade, and countries that legalize marijuana might be considered as acting in violation of the treaties.

“We believed in our sovereignty and we didn’t take this factor into account,” admits Augusto Vitale, a former president of the Institute for the Regulation and Control of Cannabis. “We did not take into account the U.S. Terrorist Act or U.N. regulations.”

Reasons to legalize

Many reasons are cited for legalization, including potentially unfair application of marijuana laws, reducing drug-related violence and weakening organized crime. But reaping tax revenues is among the most-often put forward reasons for legalization. Canada’s largest marijuana growing company, Canopy, is valued at more than $10 billion and the top 12 Canadian marijuana companies are worth nearly $55 billion in Canadian dollars. Before legalization, Canadian authorities estimated that $5.7 billion Canadian dollars were spent on marijuana yearly, 90 percent of which went to the black market.

Legalizing marijuana in the U.S. on the federal level would allow the federal government to tax sales and could potentially net all levels of the government $17.4 billion annually, half of which would come from reduced spending on drug enforcement and incarceration. A new report from the cannabis analytics firm New Frontier estimates that legalization could result in revenues of an additional $105.6 billion between 2017 and 2025. That figure includes projections for business tax revenues, payroll withholdings, and a 15 percent sales tax. Meanwhile, fully legalizing cannabis today would add 654,000 jobs and up to 1 million jobs by 2025.

Takeaway

Full legalization of marijuana could be a boon to the federal and local economy by raising revenue without raising taxes, creating jobs and resulting in savings in law enforcement. Colorado and Washington were the first states to legalize marijuana, and sales in those states over the past years are better than was expected. In 2015, the state of Colorado got more than $135 million in tax revenue and fees from marijuana. The total sales in 2015 were more than $996 million. In North America, experts project sales to reach $20.1 billion by 2021. But Colorado’s first “marijuana czar” Andrew Freedman, warns that lawmakers should be wary of legalizing marijuana solely for the potential economic benefits. There are many other considerations at stake such as the potential for increased use by young people and possible public health concerns. Legalized marijuana would most likely be a boon to the economy, but the jury is still out on all the ramifications of legalization.

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